Pound falls as fears of weak government stokes Brexit concerns

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13 June 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound slipped further on Monday, falling to a fresh seven month low against the Euro below the levels reached in the immediate aftermath of the UK general election on Thursday.

L
ast week’s election has brought nothing but uncertainty in the UK, with Theresa May’s Conservative Party yet to formally come to an agreement with the DUP in order to form a minority government. Investors are growing increasingly concerned that the lack of a majority government and pressure on May’s leadership could weaken her and indeed the Conservative Party’s hand in the Brexit negotiations, set to begin next week.

As we said immediately following the election result, we think that additional losses could be on the cards for the Pound in the coming days. It is becoming increasingly clear that the Brexit negotiations are likely to take longer than the two years set out in Article 50 and a fractured government will do nothing to speed along negotiations.

This morning’s inflation numbers caused Sterling retrace some of yesterday’s losses, with consumer prices jumping to a four year high 2.9% in May (Figure 1). The Bank of England will be meeting on Thursday, although we expect the central bank to maintain it’s steady as she goes stance and refrain from changing its existing communications. Its view on the recent bound in inflation will be interesting to gauge the possibility of a sooner-than-expected hike before the end of the year.

Figure 1: UK Inflation Rate (2013 – 2017)

Dollar steady as all eyes shift to Fed meeting

The Federal Reserve will be the highlight of a particularly busy week of currency trading when it announces its interest rate decision on Wednesday evening.

We have been saying for a while that the Federal Reserve will raise interest rates again this week and the market seems to be in agreement, pricing in a near certainty of a 25 basis point rate increase. The key to the Dollar will instead be the release of the latest “dot plot” from the FOMC, which shows where each member of the committee expects rates to be at the end of each year.

Currency traders will also be looking for language that would suggest the economic slowdown in the first quarter of the year is likely to be temporary. Overall we think the risks are skewed moderately to the upside, and expect Janet Yellen to keep the bank’s options open for one or two further hikes at both the September and December meetings.

Macron dominates French parliamentary election

Another resoundingly impressive performance from market friendly French Prime Minister Emmanuel Macron provided decent support for the Euro as London trading opened on Monday.

Despite the worst turnout in modern history, Macron’s En Marche! Party cruised to a comfortable parliamentary majority, with the populist National Front Party lagging behind in third place with just 13% of the vote compared to 32% for En Marche. The resounding rejection of populism in the French Presidential Election second round vote and again at Sunday’s’ Parliamentary election has continued to calm fears that Europe’s second largest economy could be heading for its own exit from the European common market.

Next up in Europe will be this morning’s economic sentiment data from ZEW, which are expected to show a modest increase on last month.